Smurfit WestRock PLC (SW) 2012 Q4 法說會逐字稿

Good afternoon everybody who's here present, and indeed all of those on the conference call. And welcome to the Smurfit Kappa Group fourth quarter and full-year results presentation.

I'm joined by our Group COO, Tony Smurfit on my right; Ian Curley on his right; and Paul Regan on his right again who's the Group Treasurer. So thank you for your presence.

Let me start with the 2012 results. I'm glad to report a strong result for the year. 2012 EBITDA at EUR1.02 billion is our second best result ever. It represents an 8% EPS growth to EUR1.08 and an EBITDA margin of 13.9%.

Basically, it's underpinned by two factors. Firstly, the integrated model which you consistently hear us talk about which is effectively a packaging business backward integrated into paper, where we are basically pricing through the cycle in one part or other of our supply chain. So we never have a boom or bust type of environment; and secondly, a very strong market-facing activity in our packaging business which has continued to try to drive value rather than volume as a fundamental business proposition.

Basically, the result ends up with on face value a 12.1% return on capital employed. But, in fact, the underlying level is about 12.6% when we base pro forma Orange County which I'll come back to.

As a result of the strong performance in 2012, but to be honest which as a result of the consistently strong performance both in terms of profits and in terms of cash flow, the Board are recommending a final dividend increase of 37% to EUR0.205 as a reflection of the confidence in the business and the prospects for the business.

As you will be aware, we have indicated a solid start to 2013 and while as a principle at this time of the year, we don't guide 2013 for the very simple reason that we don't want to misguide it, but we can indicate that we've seen a solid start to 2013.

You're aware that we and indeed with the wider industry following in behind have announced a paper price increase of EUR60 a tonne with effect from February 1. And we're confident of achieving a significant element of that price increase in short order.

One of the things we consistently point to is the quality of our earnings. As I mentioned, the integrated model underpins much less volatility in our earnings profile. And as you can see, our EBITDA margins over the last five years have ranged between 12% and 15%.

The result of the margin and business performance underpinning it has allowed us, in our view, to have a significantly greater amount of strategic and financial options.

And we see in terms of use of cash four options for us. The default position is a continued debt pay down which Ian no doubt will touch on. The second one is we have a business that is substantial and we have invested significantly over the years, but have been careful obviously in tight markets and relatively high leverage historically to be very judicious with the use of CapEx. But we have many projects that we have invested in that are delivering a very strong asset base. And we have more to go that will help us both in terms of cost takeout, operating efficiency and performance overall.

The third area is obviously we are committed to, and since IPO in '07, we've committed to a dividend policy that would be a strong underpin to a growth stock. And that fundamental hasn't changed and so our progressive dividend is part of our objective. And I think our statements around the final dividend for 2012 is a testament to that.

And finally, we are in the business of seeking and trying to secure accretive acquisitions that are a good fit strategically for our business and allow us to leverage our scale, leverage our tools, leverage our capabilities into a wider platform. And as I said, Orange County is a good example of that.

We basically have acquired Orange County with effect from December 1, 2012 and I'll touch on that later. But this is a very attractive acquisition in our view, and one that has upside potential for us in 2013 and beyond.

Despite the fact that we are committed to those four uses of cash, we have imposed a discipline on ourselves to stay within a leverage multiple of less than 3 times net debt to EBITDA through the cycle.

So, with that introduction, let me hand over to Ian to take you through some of the financials.

Thank you, Gary. Let me start with the full-year financials here. Revenue has stayed broadly similar year on year at about EUR7.3 billion, which reflected flat volumes through the year and a slight decreases in box prices. And despite the volatile input cost, the Group is reporting EBITDA of EUR1,020 million, which is slightly ahead of 2011, and that's our second highest result year to date.

Our improved EBITDA margin of 13.9% in 2012 also reflects further cost takeout of approximately EUR91 million and maintenance of corrugated pricing, despite a downward trend in testliner pricing throughout the year.

Higher pre-exceptional operating profit combined with lower interest costs year on year delivered an 8% EPS growth to EUR1.08. Net exceptional operating gains of about EUR18 million were Sturovo disposal and Valladolid land sales of plus EUR24 million, which was somewhat offset by acquisition costs and redundancy costs in Orange County of about EUR5 million.

Return on capital employed of 12.1% but, as previously mentioned, our underlying return on capital of 12.6% for the year when you adjust for the Orange County acquisition, which was finalized in November of last year.

When you look at the free cash flow at close to EUR300 million, it was marginally down on 2011 due to CapEx of EUR45 million, working capital of EUR50 million and tax of about EUR40 million.

Net debt was up about EUR40 million after spending EUR260 million on Orange County and left our overall leverage year on year flat at 2.7 times.

Turning now to Q4, underlying revenue Q4 on Q4 on a like-for-like basis was down about 2.6% and that was mainly in Europe. EBITDA in quarter 4 was highlighted previously, was affected by a maintenance downtime of about EUR10 million, but at EUR240 million, it was ahead of consensus at EUR235 million and exactly as guided year on year.

Free cash flow of EUR118 million versus quarter 4 2011 was negative by about EUR18 million. Working capital was up by EUR56 million and CapEx by about EUR30 million.

Net debt, as I said, was up by EUR40 million and the leverage year on year flat at 2.7 times, well below the 3 times that we've highlighted.

Turning to the next slide and walking through the cash flow from EBITDA to free cash flow. The Group reported cash interests of EUR235 million in 2012, which was EUR10 million less than 2011 and will be about EUR210 million for 2013.

CapEx during the year amounted to EUR293 million, equating to 82% of depreciation and this is broadly in line with guidance. We expect in 2013 this to increase to about 95% to 100% of depreciation.

An increase in cash tax of EUR113 million from EUR72 million in 2011, this increase reflects two main changes; the increased profits in higher tax markets in Latin America in 2011 and the introduction of legislative changes in Europe, restricting the use of tax laws was brought forward. Overall cash tax for 2013 will be marginally less at about EUR110 million. Other in the slide here is mainly pensions at EUR50 million.

Turning to the next slide and to financing; as a result of the Group's robust performance, SKG was able to complete an amend and extend of the senior credit facility in February 2012. This has since allowed the Group to refinance over EUR1 billion through bond issues.

The average debt maturity has increased from 4.4 years in December 2011 to 5.8 years at December 31, 2012. The Group is continuing to move towards a corporate style debt structure, with secured bonds now making up 69% of SKG's debt.

Reflecting this is the most recent bond transaction of EUR400 million, was issued at a rate of 4.125%, maturing in 2020. The Group maintained net debt to EBITDA of 2.7 times year on year and this was achieved in spite of the Orange County acquisition of EUR260 million.

The next slide illustrates the Group's progress in diversifying funding sources throughout 2012. You can see here subordinated bonds have been eliminated and secured bonds have increased by over EUR1.06 billion over the course of the year.

Similarly, by looking at the debt maturity profile on the next slide, you can see that significant progress has been achieved by the Group and is demonstrated here.

The success on amend and extend in early 2012 and the subsequent bond issuance the last 12 months are an indication of the confidence of the credit market in the ongoing performance of the Group, and over 90% of our debt matures in 2016 and beyond.

I'm now going to hand over back to Gary who will turn to market update.

Thanks, Ian. Just turning to the business and the marketplace, Smurfit Kappa Group continues to be the undisputed market leader in the European paper-based packaging market. You can see on the slide, on the right-hand side, that notwithstanding the M&A type activities that have taken place in Europe, we continue to be the largest and, we would argue, the most successful business in Europe. We are also the only large-scale pan-Latin American operator in Latin America.

In terms of our offering, we have basically the widest possible range of paper-based packaging available to all of our customers via One-Stop-Shop and that ranges from forwarding cartons to Bag-in-Box to solid board packaging to corrugated packaging to marketing display, transport and so on. And we also offer the widest geographic coverage in all of those product areas.

As part of our offering and, indeed, as part of an endorsement of that position, you can see that the major companies, the pan-European companies who negotiate their contracts centrally, have grown their business with us by 3% year on year in a market where packaging in general is down somewhere between 1% and 2% in Europe.

We have a very diversified customer base, so we have not got any concentration or high risk to the overall organization, to any one particular customer. We serve over 60,000 customers in our core markets of Europe and the Americas. That's comprising Orange County and our Latin American businesses which are now basically denominated as the Americas.

And, as you can see from the chart, our top five customers comprise approximately 10% of our volume, with no one customer exceeding 3%. And so, therefore, as I said, the diversification of exposure is minimized as a consequence of that.

The focus for us is not on being a supplier of packaging but rather of being a partner to our customers, particularly in the FMCG sector, which is clearly a hedge to the downside in these type of tough economic markets.

We have 675 designers across our total system, offering design innovation, both structured and graphic, to all of our customers in all parts of the network and it's something that's pretty unique to us in that all of that design capability is available to all customers, irrespective of where they are.

For the sake of clarity, we continue to be focused on price over volume. Obviously, one has to be conscious of volume, but price over volume is an easy equation for those of us who -- those of you who know us in that every 1% price increase for us is worth approximately EUR40 million to the bottom line, and every 1% volume increase is worth about EUR14 million to the bottom line.

The integration which you hear us talk about time and time again is important to understand. It really does underpin the consistency of the earnings in Smurfit Kappa Group through the years and through the cycles. It avoids any of the boom or bust type of circumstances that we see in some other businesses.

We are, by definition, short in recycled paper which allows us to buy recycled paper in the market and we're long in Kraft paper. We buy the grades and the widths of paper that are -- don't suit our own system and obviously in Kraftliner it's the strongest grade in the system and we sell that into the market through swaps or straight sales.

This allows us to basically run our recycled paper mills, which have been hugely invested in and are now best system in Europe at full capacity utilization across the grades, that best suit our organization, otherwise known as the sweet spot.

The second thing is in terms of the network of businesses we have between box plants and mills, we have a logistics system and a network that optimizes the product allocation and delivery costs so that we are able to minimize the journey distances, minimize the working capital invested and optimize the fit and match of the paper to the box and vice versa.

We have a very strong central planning system that is dynamic in nature and allows us to switch and optimize on an ongoing basis. Our supply chain system is the backbone of ensuring that the box business always has the right grade in the right place at the right time.

Most importantly, in this business where we get used sometime to oversupply and worries about excess supply over demand, there are times and indeed many times in the business where there's shortages.

For example, we had an incident with our Facture mill, this is our Kraftliner mill in Europe, in 2012 at a time when Kraftliner was very tight and there were people very, very short of Kraftliner; we weren't because our system worked.

But in recycled, we have 75% grip; that is we can access 75% automatically of the raw materials we need to make our paper, no matter what the circumstances. The other 25% we trade in the spot market to ensure that we know exactly what's going on.

But the most important thing is with Smurfit Kappa Group, our customers can be assured of supply irrespective of circumstances. The Kraftliner business and we are the biggest Kraftliner producer in Europe, in a market where the market is actually short, about 1 million to 1.25 million tonnes of Kraftliner. We have 40% of the production in Europe. It is the strongest grade in the industry. We have a total capacity of 1.6 million tonnes and we're long by about 500,000 tonnes, which we either swap or sell.

40% of our production is in the higher value White-top Kraftliner, which is obviously in the high quality products is the trend to which people are moving, white and multicolored.

The market for Kraftliner continues to be strong for a number of reasons; A, structurally short in Europe; and B, the structure in the US is much more rational and the US market is in reasonably good shape.

As I said, we're market leader. We had a EUR90 a tonne price increase in 2012 and the US imports close to the year end, year on year are down by 2%. In fact, they're down more than that, but because we needed import to Kraftliner to make -- to substitute for the fact that we were down 70 days, in fact [Touram] Peterson closed their business in 2012, but for that, those imports from the US would be down even more because these were imports that we went hunting for.

There are very high barriers to entry in this sector in Kraftliner. Effectively, it's impacted by limiting of permits, planning approvals and secondly, the high construction costs. Effectively, it costs about EUR1,500 a tonne to build a Kraftliner mill, compared to about EUR700 a tonne to build a recycled mill.

As you know, a focus of our business is an increasing exposure to the higher growth Latin American businesses. We have been in Latin America since 1986. We have a portfolio of businesses in Latin America that allows us to mitigate the risks that do exist in operating in these parts of the world.

We have presence in 11 countries in the Americas, if we include our Bag-in-Box business in Canada and our new operations with Orange County in the US.

The Latin American business in 2012 represents just north of 20% of the Group's EBITDA and it is the high-growth region and the region on which we were most focused in terms of the opportunities.

In 2012, we had a poorer margin than normal; we had a margin of about 15%, which was materially affected by a number of one-offs associated with political and labor issues, particularly in Venezuela and in Argentina.

Most of the issues have been resolved and we fully expect margins to head back towards our normal range of margins, which is between 15%, 16% to 20%.

Turning to Orange County, which is now known as Smurfit Kappa Orange County. This is an integrated paper-based packaging business with operations predominantly in Mexico, but with some operations in the US.

Effectively, they have 10 plants, eight of them in -- 10 converting plants, eight in Mexico and two in Los Angeles, with a recycled paper mill in Dallas, just outside Dallas.

We bought this business or announced the purchase of this business at a fairly timely period when, in fact, the US paper prices increased by EUR50 a tonne -- $50 a tonne should I say for the first time in two years to three years. And so we hit the sweet spot in terms of timing.

The pro forma number of which we purchased Orange County was $53 million, which was a multiple of about 6.3 times. The actual outcome for 2012 for Orange County was about $60 million, a 13% increase on that number, driven predominantly by the paper price increase, but with some implementation into the packaging side.

The integration is going well. The fit is extremely good. The overlaps are minimal. The complementary nature of the customer base and indeed the production facility base is very, very positive. And so far so good and the commitment to the market is that we will give a full update on Orange County, including our expectations on synergies. We've announced $14 million, which we expect to get, but an update on that at the end of quarter 1 when we're producing our quarter 1 results.

Let me turn to the outlook for 2013 and as I said earlier, we don't guide at this time of the year for reasons that are fairly obvious in that the volatility is -- continues to be significant at macroeconomic level particularly.

But what we have seen is a reasonably solid start to 2013, sometimes it can be quite soft depending on the nature of the markets, but it's quite solid. The box demand is stable and we continue to obviously focus still on price over volume.

We are seeing a slow but definite trend upwards again in OCC costs. They peaked about midyear 2012 at EUR149 a tonne, went down to about EUR110 a tonne and maybe a little less, and are back up now at about EUR116 a tonne and moving slowly but surely upwards.

We announced the paper price increase and there was a broadly based industry support for that paper price increase of EUR60 a tonne, which is partly the residue of the price increase in 2012 that was not completely effective. We really got somewhere between EUR20 and EUR30 a tonne of the EUR100 announced, mainly because it ran too late to actually get the whole lot through.

The need for that price increase was -- is as compelling today as it was back when the EUR100 was announced, in fact arguably more compelling because the costs and the inflation in almost every cost base has continued. And so we expect to get a significant amount of the EUR60 a tonne and that will obviously underpin packaging pricing through 2013.

So, in summary, notwithstanding what's on the chart, I think the key messages from our 2012 results and looking into 2013 is that the EUR1,020 million, the EUR1.02 billion EBITDA is the second strongest result ever. Our EPS growth is robust and it represents a continued consistency of performance against market expectation.

The free cash flow continues to deliver well and I think Ian and Paul and the financial team have done a hell of a job in restructuring our debt profile, both in terms of maturity, in terms of longevity, in terms of source and in terms of cost, positioning us extremely well going into 2013 and beyond.

The Board, as a consequence, have been confident enough to increase the dividend by 37% for a final dividend recommendation for 2012.

We are back in the acquisition market for a serious one since 2007 with the acquisition of Orange County and we think we have delivered and demonstrated that we are disciplined in acquisitions, as well as in capital investment. And we believe that this will deliver significantly for us and is strategically a good fit.

And with all of the activities I think both strategically and financially, we are well positioned to have a number of alternative options as to how we move forward in terms of value creation.

Just one last slide in terms of reminding you of what we think the value drivers in Smurfit Kappa are. The integrated system, which I've talked about really underpins quality of earnings.

Our Latin American platform and, indeed, our Eastern European platform, where we expect growth and diversity of earnings and definitely superior margins.

Our internal investment opportunities, businesses we currently own which have mileage and legs and which we want to invest behind like Bag-in-Box.

The sustained strong free cash flow, which is effectively the passport to all the strategic and financial opportunities which face us.

Our capital structure both in terms of the debt equity ratio and, indeed, the shape of it is materially better than it ever was and we are very close to being exactly where we'd like to be.

We believe we've continued to deliver on our commitments on the dividend front as a strong underpin to our growth story. And finally, acquisitions is in our DNA. It's important to buy well, but most important to integrate well and we believe that's something that we can do and will do and Orange County will be the first serious test of that in the new arena.

So thank you for your attention and Tony, Ian and myself are now very happy to take any questions. First of all, we take them from the floor and then we'll go to the telephone lines.

Barry Dixon, Davy. Gary, just in terms of the price increases and you said that there's broad industry support for those increases, could you maybe talk a bit more about that? In particular, how the German independent producers have responded and how I suppose keen they are to push through those price increases?

The second question I suppose is one that's coming up a bit more in terms of the risk at the supply side and, in particular, the risk of capacity conversion from other grades that might not be as attractive. And we've seen I suppose yesterday, a store announcing the closure, permanent closure of newsprint capacity but UPM selling a plant that's going to be converted to recycled; maybe your thoughts on that.

And then thirdly, in terms of the dividend and clearly a very impressive increase in the dividend; you talked before about a progressive dividend policy. You might just talk us through what you -- what we're looking at. Clearly, the stock it now has a 3% yield. Are we looking at an environment where dividends will continue to grow in line with earnings or how should we think about that progressive policy? Thank you.

Thanks, Barry. Let me ask Tony to maybe deal with the supply side -- well, first of all, obviously, the price increase and then the supply side.

Basically, Barry, as Gary said, we've announced EUR60, we would expect about EUR40 to have gone through in February, and with the industry hopefully pushing for the remainder in March; certainly, we will be.

I think that the, as Gary indicated, demand has been good in first month of the year. We did see somewhat of a slowdown towards the back end of last year. But we have seen a reasonably good January, with stock falling from, let's say, a high of around 500,000 tonnes to last week around -- sorry, a high of 600,000 tonnes to a number of around 515,000 tonnes as we entered -- exited last week. So industry stocks are in very good shape.

Demand as the corrugators, as we see it right now, is good. And there is no reason why the rest of the increase does not go through, and we have seen support for that, at least in the first implementation of the first EUR40.

As to the second question, capacity conversions, I think the industry has always seen some of those from time to time, whether it's moving machines to different locations or, in recent times, the Stracel project.

I think at the end of the day, Barry, you've got to figure out where you're going to sell your product. And this is something that, in the case of the most recent conversion, they seem that they will integrate fully. They'll follow our model because they actually buy on the outside somewhat, so they have a readymade market for it.

Starting a conversion of a newsprint or another machine into containerboard without a readymade market is a very risky and very dangerous thing to do. And I don't think that there'll be that many of them as we look forward because you've got to have, A, the supply of waste paper, which, as Gary's mentioned, has an upward trend in general; and B, you have to have the market for it. And there is more and more integration in the markets, as we see it.

So I think it is always a risk, but I don't think it is an excessive risk.

And it's worth, just before I ask Ian to talk on the dividend policy, or the four uses of cash, which has become known as, but the other thing that's worth bearing in mind. If you look back at the last five years, and even the last 12 months, LTM, the supply/demand balance has not disimproved. In actual fact, it has marginally improved.

And so while it's low key and slow and painstaking, there are closures taking place, small and medium-sized closures. And even factoring in the Stracel conversion, which is not coming cheap, these conversions are still -- you're into EUR300 million-plus type of expenditure. These are not a walk in the park. So I think it's something to watch, rather than fear.

Ian, do you want to talk on the dividend?

Yes. Just in relation to the dividend, Barry, when you look at the cash flows, as I said there, we gave guidance on the CapEx. Depreciation next year will be about EUR350 million, and the CapEx would be about 95% of that. So we look at the CapEx there, or thereabouts.

When we look at the dividend or the other uses of cash flow, the remainder are dividend, debt and acquisitions. So if we look on the dividend side, when our debt was about, what, EUR3.3 billion, we said at that time, as we progressed towards EUR2.8 billion, we would relook at the dividend. And as we progressed towards that EUR2.8 billion, we brought the dividend in at about EUR50 million.

As we've had further upgrades to where we are, at BB, we again listened to the market, the EUR50 million to EUR70 million, and that puts us bang in amongst the comps. So the dividend's dealt with.

So we're left really now on the debt side and the acquisition side. We see ourselves a good, solid BB credit, as I was saying, maybe BB plus. And the reason we would do that is the focus, again, on the equity markets.

One of the issues many, many quarters ago was the concern, due to the quantum of your debt, would you be able to refi in the market. We've always demonstrated that we never had an issue there.

But to be a BB, or a BB plus credit in any downturn, in any time going forward, would mean that capital markets are always open to us. And then, once we -- when we deal with that, as Gary was saying, our focus would be on the acquisition side.

So the dividends just can't be seen in isolation; they must be seen in the uses of the remainder of the cash flow.

Thanks, Ian. Lars?

If I may, just coming back to Tony. When you talk about a good market, is there a directional change that you see in Q3/Q4, and heading into Q1, material; i.e., why are we calling this market good when it was softest in Q4? What's the change you've noticed?

I don't think we should jump to any conclusion, Lars. January can be a funny month. But I think that, equally, we did see somewhat of a slower December than we had anticipated. And we're seeing somewhat of a better January than we would have anticipated.

So I think it will be too quick to say January's going to be indicative of the year going forward because just what we see right now is good, but it's one month and it's a funny month, January, because you've got a slow start sometimes and so I don't want to be overoptimistic. I think it's good at the moment, but we need to see that trend develop, rather than --

Lars, just one point, you know this better than anybody, but we can't up the macros. This business is a GDP or an industrial production play, and you guys are probably much more familiar than even we are on what all the pundits are saying about Europe, specifically.

We have, actually, ironically, slightly outperformed the industry in terms of our activity levels; mainly focused on the high-value international customers, where we got 3% growth in pan-European sales.

But when we talk about good in these environments, good is steady, not deteriorating, not declining. As Tony said, a bit of aberrations here and there, you'll always find. So it certainly doesn't feel as if it's declining any more, and may well just be stable.

So how should we view then the testliner price increase? What is actually driving that? Is that industry cost base, the need for the price increase or --?

I think when you get close to 500,000 tonnes of stock in the system, the supply chain becomes short. The export market is reasonably good, so people are able to export any excess production they have at a reasonable price. And I think that the general level of demand is good enough that it's supporting it.

So I think the factors for the increase -- and plus, the testliner producers, this is not a good business over the last number of years. If you've been in testliner, you have not been making very much money. The margins have been squeezed consistently through costs going up and prices being under pressure, so it's not been a good place to be. But, obviously, with the current pricing, there's an absolute need by practically everyone to get pricing initiatives through.

Just two further questions. You talked about, obviously, that you had a cost target last year, which you fell short of due to Facture. What are we looking at? What should we expect in 2013 in terms of cost takeout?

The second one, obviously, you had a bit of rough year in Latin America; Gary said you expect margins to normalize and improve. What sort of visibility to do we have on that?

Now, I assume that OCC or Smurfit Kappa Orange County nowadays, margins there were a bit lower. Is that taken into consideration when you're talking about going back to the normal margins?

If I take the Latin American one first, the issues that caused the margins to be down were very specific. In many instances, they were industrial relations. So while they're within their political framework and a turbulent framework, they were actually good old-fashioned industrial relations issues; some of them of a particular nature in that part of the world.

One of the reasons we can be confident of progress is, obviously, we've addressed some of those. Like most industrial relations environment situations and particularly settlements, there was an element of compromise in the settlement, but it's acceptable. So that's boxed off.

What we, obviously, have no visibility on is just how turbulent the political economic environment will be, other than our assumption is it won't be much better. But it won't be much worse; it's challenging anyway.

So if you take that out and even our particular performance in Latin America in 2012 was particular to two particular quarters. Two of the other quarters were better. In our better marketplaces, and historically we've always had -- if we've had two of the four pillar businesses in Latin America doing well, Latin America does well; if we've three, we have a home run.

And our Mexican and Colombian businesses, our two biggest businesses, are doing very well. The Colombian business has done well, but has had a challenging currency because of the strength of the performance of the country. But obviously, we are -- what we have to do is, obviously, dig deep, get the cost efficiencies better, and get returns on huge investments we've put in there. And we're beginning to see some real progress there.

So we are saying, Lars, to be very explicit, we're saying we will see a recovery independent of OCCG in the historic Latin American businesses.

Then if you look at OCCG, their margins were and are lower than our traditional margins in that part of the world, for a variety of different reasons. And part of our expectation in terms of the merger and integration, which is part of the DNA, is that we will, hopefully, both through synergistic and, indeed, management issues, be able to improve those; and maybe get some benefits to our own Mexican or international businesses from ideas they have. So there'll be a two-way flow there.

Remind me what your first question was because I can't remember. Can you remember?

You answered it.

All right, Tony answered it, that's why. Okay, any further questions?

Kartik Swaminthan, Bank of America Merrill Lynch. A couple of questions, if I may. Firstly, a question for Ian. I was wondering what the refinancing potential is in the short term. Do you have any bonds that are potentially coming up to be callable, where you could drive down the interest rates given you've had a lot of success with your recent offering and if there's any bank that that's coming up for expiry that you could take a look at?

Secondly, I just wanted to circle back through the dividend. So if the order of priority is to look at CapEx and then what you could potentially pay out to shareholders through the dividend, and then there afterwards debt and M&A, should we read into that saying that in the very short term, you don't see much of a pipeline for M&A, or possibly you'd relegate yourselves to smaller deals or midsized ones?

And thirdly, I just wanted to come back to the CapEx as well. Apologies if I missed this earlier, but you're increasing the ratio of your CapEx to depreciation and I was just wondering exactly what projects that money was going into. Thanks.

Do you want to take the debt one Ian?

Just in relation to the debt, we have about EUR500 million worth of bonds callable in November 2013; we've another, what, EUR500 million in 2014.

With regards to senior credit facility, we've nothing maturing early, but as we improve our credit profile, as we move, as we have moved out of the leveraged world which is demonstrated with regards to recent issuances, that is something we will have a look at, at some point in time will be a senior credit facility. But they are the three things that we focus on.

And, Tony, do you want to talk about the CapEx projects that we --?

Yes. I think we continue to see great opportunities to reduce our cost base. I suppose when we put the merger together, we had a lot of low-hanging fruit, and we took that and now we have still much to do. And in order to get some of those costs, we are having to invest a little bit more.

We also have approved a number of significant projects, such as the Bag-in-Box project which is going to cost us EUR28 million to build a new facility in a very fast-growing business for us, and we want to follow that growth.

Also, we have a very large investment going into our mill here in the UK, which is order of magnitude EUR100 million, whereby we are replacing two older machines with one effectively new machine at a significantly lower capital cost than it would be to build a new one, because we've got a second-hand one.

We're not adding any significant capacity and we're making the product more fit for use, such as light-weighting, being able to produce light-weighting in the UK.

So the accumulation of those plus, as I say, looking for more cost reduction opportunities is causing us to relook at our overall spend and just to bump it up slightly.

(inaudible - microphone inaccessible).

Well we would always look for at least 20% in those major projects that I've been talking about.

A lot of our projects, unfortunately, have zero payback because they're just stay-in business, but on those two particular large ones I just mentioned, there will be more than 20%.

I mean it's important to bear in mind -- in fact, the question I didn't answer that Lars raised was the cost takeout program.

The cost takeout program target, which again just to remind people is not just picking numbers out of the sky, it's a bottom-up budgetary process and, as you know, we only announce them after the year-end mainly because we only finish our budgets close to the year-end in terms of finalizing the following year.

So our target for 2013 is EUR100 million, order of magnitude, and it's consistent with what we've been doing over the years, but obviously, the challenge to deliver it, it gets higher and higher and so, as Tony said, part of the CapEx increase is to underpin and support further efficiencies and productivity in our existing businesses.

Just to come back then to your general point about the use of cash, which Ian has already touched on. I think it's important to remember it's not -- we don't rank all of them in particular order, the CapEx one is maximum 100% is kind of where we're saying we're able to go.

Not because of something dramatically magic about that, because we do recycle equipment, so we get more than 100% in terms of bang for our buck, as we move equipment that's no longer suitable in one place into another place.

We very seldom throw it out or break it up, and we certainly don't sell it off in terms of the big stuff.

But secondly, we need to project manage these. Tony has announced two or three projects. We don't have high-quality project managers and technical guys as part of the overhead freely available to run as many projects as we maybe might want to. But more importantly, we need to get returns on them, so you have to do them well. So that's the discipline; it's financial and operational.

In terms of the dividend, we've committed to a progressive dividend, that we stepped it up to the market levels and the continuation will be that we will be matching sensibly dividend policy with earnings capability.

But let's be very clear, the default position absent acquisition opportunities is further debt pay down to get to where Ian wants to get to in terms of the profile of the business and maybe a further rating upgrade.

And M&A, we have probably EUR500 million every 12 or 18 months of capacity to do deals like Orange County, where we were able to fund it out of our own resources, effectively have no impact on the leverage, despite the fact that is was at the end of the year. So if you pro forma, it had -- the leverage continued to reduce.

So that's the way we think about it and just to wrap it up, we stated at IPO this was a growth Company with a dividend underpinned, that hasn't changed.

Eshan Toorabally, Goldman Sachs. So just on the acquisition side, just wondering where you would look to maybe add acquisitions, is there a geographical preference?

So we saw the Orange County acquisition, for example, in Mexico, US, etc. So is Europe a priority in terms of further maybe consolidation, or is it going to be more in growth markets?

And then secondly, just in terms of, I guess, connected to that, in terms of your geographical split, is there a target in terms of growth markets that you would like to have relative to Europe? Thanks.

Well, our key position historically, and, guys, chip in if you would, has been we want -- we take a view that Europe and certainly in the near term, European growth, which effectively is a measure of how we play in our business, is flat and there's nobody shouting any likelihood of material growth in Europe; by Europe, here we define it as Western Europe, in the next few years. I mean there's a lot of things that need to get settled. I don't think Europe is forever damned, but I think in the next couple of years, it's difficult.

We have very strong market positions in many of the big countries in Europe. It doesn't mean we haven't opportunities. One of the deals we did a couple of years ago was to swap some assets and money with Mondi in the UK and Tony and the team have executed the Mondi integration into our UK business exceptionally well.

We have gone from a very tough market in our UK business to an exceptional performer and doing extremely well.

So it's not off the cards, but it's more bolt-on and gap filling as are seen from big deals. There's no obvious big deal in terms of integration and rationalization in the European market. Certainly, that's looking at people in the face and certainly at prices that people would be prepared to pay if they were available.

Eastern Europe is certainly an attraction for us and we continue to try to grow there slowly but surely and it is growing.

And Latin America, we've very clearly said that geographic diversity and our ability to operate in markets like Latin America with the higher margins in return for the higher risk, is something that we think is a differentiator in the DNA of Smurfit Kappa and so that's the focus area.

Over and above that, opportunistically; obviously, we have a small footprint in North America. Are we targeting to re-enter it? No, not particularly, but clearly, we have a footprint there.

Okay. Any other questions from the floor? Let's go to the telephone lines and check if there are any questions from the telephone line.

Thank you. (Operator Instructions). James Armstrong, Vertical Research Partners.

First question is what are you seeing in terms of costs in the difference regions? And, as you look into 2013, is there any significant quarterly variants in maintenance?

Thanks, James. The question is what -- are we seeing any cost trends in the regions and, specifically, is there any quarterly variation in our maintenance expenditure? Tony, that sounds like one for you because I don't know the answer.

Yes. I would say that we're not seeing any major upward trends with the exception that energy continues to look like it's on an upward momentum, so to speak where we spent a little bit over EUR20 million last year more on energy than we did the previous year, and that kind of trend maybe a bit more so is looking like what we'd be looking at this year.

I think I'm not seeing, other than starch and some chemical costs, which look to be rising, some of our plastic costs for our Bag-in-Box business look to be rising, but nothing really dramatic.

Wood seems to be basically under control, with some upward momentum in some of our mills, but they're more specific to lack of sawmill capacity than anything. There's nothing really. And on maintenance side, I --

In relation to maintenance, James, I was just looking at the numbers very quickly, having never been asked the question before. But if you look, the total maintenance for the business, and you've got to take it that Orange County in here, so I don't have the exact numbers, total repairs and maintenance for 2012 was about EUR450 million. And in quarter 4, which I have the numbers of, it was EUR111 million, so, effectively, a quarter there.

In the prior year, we had maintenance again, about EUR400 million and repairs and maintenance in quarter 4 was about EUR104 million. So all I can give you is what quarter 4 looked at. So there's no real swings, I think, quite frankly, within repairs and maintenance.

No. I think, James, you have to remember in repairs and maintenance a lot of it is -- a significant amount of it, and hopefully more and more is planned rather than unexpected. And so, therefore, it has to be planned and evenly spread around us continuing to do our business and obviously there are times of the year when the major downtime is taken. For example, in the Kraft mills, in quarter 3 normally; last year, we had to move it into quarter 4 for reasons of Facture.

And just on the energy one, as Tony was saying, while the trend is upward, we hedge our energy positions and we'll have about 60% in value of our 2013 energy hedged at this point in time. So we're not kind of swinging freely in the wind.

Other than that, I think the general sense for sure is that there's a pressure on costs; all the more reason why we need to get paper price increases and returns into our packaging.

And if you look at our cost takeout program, effectively a significant amount of it is basically anti-inflationary. It's covering off inflationary costs in our existing cost base.

Perfect. And then with the additional CapEx, is there any opportunity to debottleneck some of your European kraft capacity and maybe squeeze a little bit more out of that?

Tony, do you want to say something?

We're reasonably good in our Kraftliner mills at what we're doing. We have -- some of the emphasis of our CapEx program over the next two to three years is in our French mill, where we will debottleneck and add some capacity.

I think the CapEx, those programs that I mentioned there, we have a number of them that are continually debottlenecking, such as the Hoya mill, which used to be 280,000 tonnes. We've spent EUR43 million bringing it up. Well, we will have spent EUR43 million bringing it up to a 420,000 tonnes run rate probably from June onwards. We're currently just finishing the last re-winder and wet section rebuild.

So we are continually, James, debottlenecking to make our system more efficient, and I think that's been demonstrated since the merger. We used to have 21 mills producing 3.2 million tonnes and today, we have 12 mills doing 3.2 million tonnes, and that's just continually adding capacity in our champion-type mills.

One of the other things, James -- sorry, Tony, I beg your pardon. Sorry, one of the other things that Tony's been doing with the guys is, apart from debottlenecking, which is if we can get our machines running well consistently through the year with good maintenance programs and some CapEx, that's the best form of debottlenecking because a consistently strong run rate is the best way to get tonnes off the machines.

But the second area where we've been very focused is in the energy costs. And obviously one of the areas where we have some capabilities and versatility is obviously in our Kraftliner mills, where we can basically move more and more into the bioenergy area.

And we have, both either ourselves or in conjunction with some third parties, invested heavily in biomass boilers and alternative fuels, such that the energy costs of our Kraftliner mills, and, indeed, our sack kraft mill in Nervion and our MG paper machine in Sanguesa, both in Spain, the costs of energy are coming down dramatically at a time when European energy cost pressures are obviously upwards. So that's a real positive.

Perfect, thank you.

Mark Wilde, Deutsche Bank.

I actually have a couple of questions. One, I wondered, and I may have missed this already, if you can just give us a little color on this current testliner initiative. And what -- how you would read the prospects here, particularly in light of the fact that you only got about one-quarter or one-third of a temp last fall.

And then I wondered, in terms of the capital programs, whether it's possible to get out any kind of a breakout Latin America versus overall Group. And also related to capital, I think there were a couple of -- two or three containerboard machines in Mexico that had been proposed and I wondered if we could get an update on that.

Okay. Why don't I get Tony to give you color on the testliner and I'll get Ian to give the breakout on the capital projects. And maybe, Tony, you can talk then about the machines in Latin America. Okay, so the first one then is color on the testliner price.

Yes. Just on the testliner price, Mark, you may have missed it, we believe that around EUR40 will go in during the month of February.

Stock levels are around 115,000 tonnes, 114,000 tonnes at the -- I'm sorry, 514,000 tonnes at the end of last week. And that gives us the momentum to be able to push for the other EUR20 as well as we move into March.

Obviously, it's way too early to talk about the implementation of the whole EUR60, but certainly, as things stand right now, given the level of the markets and given the current tight demand for wastepaper-based recycle fluting and testliner, we should get the majority of the EUR60.

Ian, do you want to talk on the capital split?

With regard to the capital, from a percentage of depreciation type, typically as a percentage of depreciation, Mark, Latin America would be a higher percentage of depreciation than our European businesses. We've never broken out the detail between Latin America and Europe.

We tend, Mark, just to be clear, we tend not to have a patterned approach to how we allocate our capital. We allocate it across the Group on the basis of who gives us best bang for our buck, or who's in most need of it, given particular circumstances. Or it can it wildly variable, but as a generality, as you'd probably expect, if Latin America is a key focus area for growth for us, it is not unreasonable that both in terms of acquisition focus and in terms of capital investment focus, it tends to get favored in terms of its depreciation stream on the CapEx.

Tony, do you want to talk about the mill or the machines in Latin America?

To be honest, Mark, I haven' t heard anything new. We know that we've heard a couple of rumored announcements, one of which was, I know delayed and right now, I forget the name and I'll come back to you offline on that if I can, but I know that was delayed, but I haven't heard of anything major new starting from what's already in the system in Mexico. But I can -- I'll verify it and come back to you.

All right, good. One last thing, can you just -- can you talk maybe about what you've seen in terms of value expectation on pushback of acquisitions around Europe over the last three or four years, whether it's corrected down much?

In Europe, Mark?

Yes, well Europe and Latin America both, but I guess Europe would be a little more interesting just because of what you've gone through over there.

I think in Europe the issue is not so much what the market expectations in multiples are, but that they're just generally available. The only one essentially that has been done in recent times is obviously the big one, which is David S. Smith's acquisition of SCA and that's a very public number at about 6.4 times, I think it is out of the box.

The other one that's been done is a small piece of the Duropack business, which was bought by Mondi, that's the Ansbach business and there's rumors that maybe more of that may go, but it's a mixed bag in terms of geography and asset types and so on.

But apart from that, there's very little being done. There's a lot of noise, but very little being done. So there isn't a kind of a developing sense of a market multiple.

In Latin America, depending on whether people are thinking with a pulp mind or whether they're thinking with a packaging mind, you can probably have anything from our current trading multiple up to double it and, indeed, more besides. And obviously, that's not a space we're prepared to move in.

I think we've pinned our position very clearly in the type of pricing level and type of deal we're prepared to do with the Orange County acquisition and that's very much in the zone in which we wish to be and believe we can, with the right approach and time, generally speaking, be.

Okay. And, Gary, just finally on the Latin American acquisitions, I think historically you may have said that the only way to go into Brazil would probably be on an integrated basis. Is that still the view?

Yes. I think Brazil is -- obviously, Brazil is huge and it's a big territory for us not to be in with production facilities. We obviously do some business into Brazil.

I think our general sense would be if we can find an acquisition that suits our profile, it would probably have some degree of integration. Certainly, our very clear position is we will almost never go into a new market by buying a mill without packaging. We might go in buying packaging without a mill and backstop it later.

Okay, very good. Listen, good luck in the first quarter and the balance of the year.

Thank you very much, Mark.

Daniela Constantino, Mason Capital.

Two quick questions for you, sort of follow-up on Mark's question. Could you give us a sense, the EUR100 million that you're targeting for cost savings this year, is OCCG included in that or is that a separate bucket?

No the answer is no, it's not. Sorry, it's not included, just to be specific.

Right. So then on Q1, you'll give us an idea of what the cost savings there should be or --?

Yes, we'll give you the overall update on the synergies program and the state of integration and so on. So we'll give you as full an update as we can.

Okay, great. Then just given the growing significance of Latin America for your total Company and now the fact that you have, I guess, Smurfit Kappa Orange County, the US presence, have you considered a US listing?

I think our approach to listing -- we've a couple of approaches to listing. First of all, we've never considered a listing to be an issue when things were difficult and so the perception of any issue around an Irish listing and a secondary in London, in our minds, hasn't been an issue.

In terms of changing our listing, we would never change our listing in the context of just a listing move. Or certainly, never is probably too strong a word, but it is not in our contemplation.

Whether there would be justification to consider a further or an alternative listing in the context of some M&A activity, that's something we certainly would be keep an open mind on.

Great. Thank you.

Gerard Moore, MCB.

So just two questions please. For Colombia last year volume growth was pretty flat. Were you disappointed by that and what would you expect the volume growth maybe to be this year in Colombia and for maybe Latin America as a whole?

The second question then is in terms of capacity. Given all the different maybe adjustments that you're making around Europe, could you give us an idea of what would you expect your overall increase in capacity to be in testliner? Thanks.

Tony, do you want to --?

On the testliner side, the only new capacity that we're bringing on stream this year is the 80-odd thousand tonnes that we'll be bringing on from Hoya. But we're replacing -- we're not actually adding any brown testliner or fluting capacity to our system, because we've converted over and we're progressively converting over one of our strong German paper machines, making 250,000 tonnes in middle Germany called CD Haupt over to white top liners which we currently buy on the outside and to testliner ones, which we currently buy on the outside, and some laminating paper as well.

So we are not adding any new capacity into the marketplace per se, so the 80,000 tonnes is just doing it more efficiently and doing it smarter on the other paper machine.

On Colombia, I think disappointment would probably be the wrong word. I think it is important to bear in mind the strength of -- the speed of the move in the strengthening of the currency in Colombia has meant, obviously, that a lot of import/export activity has been significantly impacted by it.

Our focus, as you well know, is to continue to focus on pricing over volume and so, therefore, maintaining a value-added offering at local level with decent pricing was a priority. The net effect of it was fairly flat volumes in the year.

As the currency has settled into a more stable level and as we've driven the efficiencies in our business and getting the benefits of the capital investment programs, we expect to grow back to normal market norms of 3%, 4%, maybe even 5% in Colombia.

Overall, Latin America, clearly the type of interruptions that have impacted the margins have been effectively downtime or interruptions to business as a result of either particular problems, demand issues in Venezuela at the back end of the year following the huge spend that took place prior to the elections, but mainly downtime associated with industrial relations challenges, where we would have lost a lot of volume where we either seeded it to the market or to other parts of our system. We expect to gain that back and we consider our volume activity in Latin America to move back towards the type of norms we've historically enjoyed.

That's very clear. Thanks a lot.

Thank you very much. Okay, unless there's any further questions from the floor, we're going to wrap it up. Can I again thank everybody for being here and for those on the call, for their questions and thank you all for your support.